Q&A - Retirement Savings


Topic: Retirement Planning

Q:  What percent of my income do I need to save for retirement?

A:  The ultimate goal of retirement planning for most people is to preserve a certain STANDARD OF LIVING in their retirement.  In order to "put a number to" that certain standard of living, most people come up with a number that is some PROPORTION of what their income is today.

How much you need to save for retirement depends on a number of variable factors that differ from person to person, including:

  • your current age
  • your planned retirement age
  • how much you have already accumulated
  • how long your nest egg will need to last
  • the annual cash flow you will require to maintain your desired retirement lifestyle
  • what amount you might expect to earn (if any) from part-time work during retirement
  • the amount you expect to receive in traditional pension and/or Social Security benefits
  • your investment risk tolerance (both before and after retirement)
  • the impact of future inflation
  • and the future returns provided by the capital markets.

What you need to do then, is calculate the dollar amount you should set aside in order to generate that stream of income in the future (adjusting that income upward for inflation prior to, and during retirement). This will vary depending on your starting age and anticipated retirement age. By calculating the ongoing amounts needed to accumulate a sufficient amount, you will obtain the percentage of your income necessary.

For most people, retirement income needs tend to be lower than pre-retirement income needs, but how much lower varies based on income level, goals and individual circumstances.  That's why this is a particularly good example why "rules of thumb" are disdained by so many professional advisors.

You can 'spend your time' and do your own calculations or 'spend your money' and hire a Certified Financial PlannerTM professional to guide you through the retirement planning process by helping you to thoughtfully consider the various components of this complex formula as they relate to your lifestyle.   We strongly urge you to consider that option.  But you can get a "jump start" on the process by doing some "homework" in the form of considering what kind of income you will need in retirement to enjoy the lifestyle you hope for.  

The above is a more meaningful calculation than the "percentage of income" calculation, since each person has a different idea of the actual dollars it will take to have a "comfortable" retirement.  If you choose to do it yourself, there are simple retirement calculators on some websites also, as a place to start.

Bottom line: whether you currently make $80,000 and think you only will need $70,000 yearly to retire comfortably, or currently make $35,000 and want to retire on $50,000 per year, "doing the numbers" as above will get you closer to your real goal.  And, congratulations for focusing on first things first (doing those numbers!)